Integration with the Global Economy:The Turkish Case

Erol Taymaz and Kamil YilmazMiddle East Technical University - Koc University

Commission on Growth and DevelopmentWorkshop on Country Case StudiesApril 12-14, 2007

Turkey’s Integration with the Global Economy

Policy backgroundMacroeconomic backgroundPerformance of the automotive and consumer electronics industriesPerformance of the automotive and consumer electronics firmsMacroeconomic policies and growth performancePolitical Economy of Reform

Policy backgroundAnnual growth rate of GDP per capital, 1926-2005

(5-year moving averages)

-5

0

5

10

1925 1935 1945 1955 1965 1975 1985 1995 2005

Ann

ual g

row

th ra

te (%

)

Policy background

1980-1985: Export orientation and elimination of quantitative restrictions1985-1989: Foreign trade liberalization1989: Capital market liberalization1988-1989: Changes in FDI legislation1996: Customs Union with the EU1999: EU candidate country

1980-1987: Military rule1987: Elections and civilian government

Macroeconomic backgroundInflation rate, 1981-2006

0

0.2

0.4

0.6

0.8

1

1.2

1980 1985 1990 1995 2000 2005

Infla

tion

rate

(%)

Dramatic improvement in net public savings

Sharp decline in interest rates…

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

Jan -02 A u g -02 M ar -03 Oct-03 M ay-04 De c-04 Ju l-05 Fe b -06 Se p -06

Re al*No m in al

*(1 + n o m i n a l seco n d a r y m a r k et r a te ) /(1+12-m o n th a h ea d i n f l a t i o n a r y exp ecta t i o n )

S e co n d a ry M a rke t Re a l a n d No m in a l In te re st Ra te s (%)

Macroeconomic backgroundReel effective exchange rate, 1980-2006

80

100

120

140

160

180

1980 1985 1990 1995 2000 2005

Inde

x va

lue

(199

5=10

0)

An impressive growth rebound…

Annual growth rate of real gross domestic product, 1981-2006

-0.08

-0.04

0.00

0.04

0.08

1980 1985 1990 1995 2000 2005

External TradeGrowth rates of exports and imports (1981-2006), manufactured products

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1980 1985 1990 1995 2000 2005

Ann

ual g

row

th ra

tes

(%)

Exports Imports

How did this happen?Reforms – and what we’ve learnt the hard way --started paying off (e.g., banking reforms, adopting a flexible exchange rate, sticking to fiscal adjustment)A very benign international environment for emerging markets (e.g., easy monetary policy in the US, the China effect, strong growth in the world economy overall, low interest rates in advanced countries, etc.)A very pragmatic government that, despite some hesitation at the beginnings, has gotten on the right path, namely sticking to EU membership goal and the IMF program

Two side effects emerged, though...

(adjusting, but still a key vulnerability)

High current account deficit and ext. debt ratios

High rate of unemployment

(good job growth since the crisis, but not enough…)

Now we have two major challenges...

Turkey is still a vulnerable economy: Relatively high debt ratios – public and external –combined with a large current account deficit.

But, we need to grow 6%-7% p.a. (against a population growth of around 1.5%) to “catch up with the EU.” How do we do this while reducing these vulnerabilities?

And, inflation seems stuck at high single digits…

How do we get to “price stability”, i.e. 2%-3% inflation?

One possible answer:

Combine openness, financial soundness (i.e. what we have), with “supply-side”reforms, or further, major improvements in the “quality of institutions” (i.e. what we have yet to have)But, given this year’s politics, this is basically a job for the next government...

Growth Industries

1980s: Labor intensive, low techTextiles and Ready-made garmentsIron & Steel

Late 1990s and 2000sICT- Consumer ElectronicsAutomotive

ICT industries

1999 2000 2001 2002 2003 2004 2005Components 165 136 88 105 125 225 300Consumer Electronics 1,297 1,365 13,850 1,922 2,411 4,294 4,726Telecom. Equipment 841 924 935 952 912 975 1,250Other Prof. Instruments 335 340 305 350 415 650 965Defense Electronics 211 216 204 240 279 433 450Computers 160 200 205 215 236 428 460Total 3,008 3,180 3,034 3,784 4,378 7,005 8,151

Production

ICT industries

1999 2000 2001 2002 2003 2004 2005Components 67 64 50 61 72 104 131Consumer Electronics 781 873 904 1,571 1,938 2,914 3,084Telecom. Equipment 347 400 535 548 537 603 766Other Prof. Instruments 120 122 148 177 203 311 352Defense Electronics 66 28 19 22 51 56 56Computers 65 55 41 33 32 42 57Total 1,446 1,542 1,697 2,412 2,833 4,029 4,445

Exports

ICT industries

1999 2000 2001 2002 2003 2004 2005Components 958 1,146 1,038 1,417 1,735 2,310 1,990Consumer Electronics 420 524 402 406 617 992 1,057Telecom. Equipment 2,002 2,464 972 901 1,097 1,911 2,330Other Prof. Instruments 899 992 958 835 1,261 2,183 3,172Computers 1,173 1,451 748 880 1,336 1,545 2,286Total 5,451 6,577 4,119 4,439 6,045 8,940 10,835

Imports

Consumer electronics

2002 2003 2004 2005 2002 2003 2004 2005Colour TV 91 119 194 218 1,540 1,879 2,789 2,949Audio Equipment 79 142 220 216 5 10 10 3Video Players 29 6 55 0 0 5 66 73Cash Registers 58 6 113 99 2 2 2 3Electronic Calculators 10 9 20 19 0 0 0 0Audio Video Casettes 89 83 143 164 16 27 25 2Radio and TV antenna trans. 41 139 23 243 6 0 18 27Electronic scales and equ. 9 1 16 20 1 2 4 0Total 406 62 992 1,057 1,571 1,938 2,913 3,084

Imports (1000 USD) Exports (1000 USD)

Industrial Production Index

0

50

100

150

200

250

300

350

400

450

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Manufacturing Cons. electronics Automotive

Exports

0

2

4

6

8

10

12

14

16

18

1989 1991 1993 1995 1997 1999 2001 2003 2005

% s

hare

in m

anuf

actu

ring

expo

rts

0

10

20

30

40

50

60

70

80

90

Bill

ion

USD

Automotive (%) Cons. elect. (%) Manufacturing exports (bil.USD)

Automotive: Production, Dom. sales, Exports

0

200

400

600

800

1000

1200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Total production Domestic sales

Labor Productivity (per worker)

0

50

100

150

200

250

300

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Manufacturing Cons. electronics Automotive

Total factor productivity (2001-2006 imputed)

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

tota

l fac

tor p

rodu

ctiv

ity (1

989=

1)

Automotive Cons. Electronics Series2 Series4

Performance, firmsEmployees X rate M rate F/D

AutomotiveAnadolu Isuzu 741 15.0 34.0 FFord Otosan 7722 44.5 63.0 FKarsan Otomotiv 957 61.8 2.8 DOtokar 988 37.0 43.0 DTofaş Oto Fab 4379 48.7 46.1 FParts and componentsBosch Fren Sistemleri 246 81.2 57.0 FDitaş Doğan 576 41.0 24.0 DEge Endüstri 474 59.0 25.0 DF-M İzmit Piston 24 22.3 4.1 DMutlu Akü 561 36.0 55.0 DParsan 565 66.0 33.0 DConsumer electronicsArçelik 9203 27.5 47.0 DBeko elektronik 3907 76.3 65.2 DVestel 5631 75.4 50.0 D

Performance, firmsNet sales, million YTL (1993 prices)

0

5

10

15

20

25

30

1992 1994 1996 1998 2000 2002 2004 2006 2008

Net

sal

es

Isuzu Ford Otosan Karsan Otokar Tofaş Arçelik Beko Vestel Bosch Ditaş Ege Endüstri F-M Mutlu Parsan

Performance, firmsExport rate, 1998-2005

0.00

0.20

0.40

0.60

0.80

1.00

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Expo

rt ra

te

Isuzu Ford Otosan Karsan Otokar Tofaş Arçelik Beko Vestel Bosch Ditaş Ege Endüstri F-M Mutlu Parsan

Performance, firmsGross profit margin, 1993-2006

(gross operating profit/net sales)

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

1992 1994 1996 1998 2000 2002 2004 2006 2008

Perc

ent

Isuzu Ford Otosan Karsan Otokar Tofaş Arçelik Beko Vestel Bosch Ditaş Ege Endüstri F-M Mutlu Parsan Average

Performance, firmsNet profit margin, 1993-2006

(net profit after taxes/net sales)

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

1992 1994 1996 1998 2000 2002 2004 2006 2008Net

pro

fit m

argi

n

Isuzu Ford Otosan Karsan Otokar Tofaş Arçelik Beko Vestel Bosch Ditaş Ege Endüstri F-M Mutlu Parsan Average

Macroeconomic policies and growth

AutomotiveWell integrated within the international commodity chains

Multinational firms, both in the final product and parts & components sectors

Strong industrial base/strong supplier baseStrong supplier-user linksFast adaptation to the EU rules and regulations

Automotive Manufacturers Association

Commitment to design and high quality (especially in the commerical vehicles)

Macroeconomic policies and growth

Consumer electronicsDominated by a few large domestic firmsRight time, right place, right product(conventional televisions)Reliance on “on-the-shelf” componentsWeak domestic supplier industries

Macroeconomic policies and growth

The role of macroeconomic policies is questionableIn the 1990s macroeconomic environment is inhibiting investment and growthDespite this, these two sectors grew rapidly through exports (to EU)

Already existing private industrial baseCustoms Union with the EU in 1996EU’s December 2004 decision to start membership negotiations with Turkey

Political Economy of Reform

“Once the political incentives and constraints are correctly taken into account, policies that appear to be mistakes are perfectly rational responses to distorted and imperfect political incentives. The political economy approach attempts to explain why apparent mistakes repeatedly occur. This approach underscores that one cannot correct the "mistakes" without addressing the institutional features which make these so-called mistakes likely to occur.”Alberto Alesina.

Elites versus Civil Society

Strong state – founded and later captured by military/civil bureaucratic elitesPolitical Elites - As democracy takes a hold shares power and later dominates1982 Constitution, Political party and Election Laws made it even more difficult for the civil society to control the political elitesPolitical party and election laws give too much power to party headquarters and the leadership

Political Economy of Reform

Each political party is captured by a group of political elites who are involved in Patronage, Populism, Rent seeking Once captured never leave the party leadership to opposition The failure of Turkish political parties to replace unsuccessful cadres with potentially successful alternativesNo room for within-party opposition A plethore of political parties establishedIn each election another party is given the chance

General Elections since 19871987

RP7.2%

MHP2.9%

DYP19.1%

DSP8.5%

SHP24.7%

Bağ.0.4%Diğer

0.8%

ANAP36.3%

1991

RP16.9%

MHP0.0%

DYP27.0%

ANAP24.0%

DSP10.8%

SHP20.8%

Diğer0.4%

Bağ.0.1%

1995

RP21.4%

MHP8.2%

DYP19.1%

ANAP19.7%

DSP14.6%

CHP10.7%

Bağ.0.5%

Diğer1.6%

HADEP4.2%

1999

FP15.4%

MHP18.0%

DYP12.0%ANAP

13.2%

DSP22.2%

CHP8.7%

HADEP4.7%

Diğer4.9%

Bağ.0.9%

2002

AKP34.3%

Genc7.2%MHP

8.3%

DYP9.6%

CHP19.4%

DEHAP6.2%

Diğer5.1%

Bağ.1.1%

SP2.5%

DSP1.2%

ANAP5.1%

Institutional Reform

Without political reforms that will overhaul the top-to-bottom power structure in political parties, the politicalsystem will not function properly to create an environment suitable for sustain economic growth.Political party and election laws must be changedimmediately so that members and delegates of the party can replace proven unsuccesful leaders by promising candidates.Political parties will become the pillars of the democracy and last long rather than disappear in a decade or so.If not, the current and future governments will continue to resort to populist policies and the use of state funds inorder to be reelected in 2007. This in turn means that we are back to square one...

Thanks...